Chinese Style Federalism, 28th Dec., 2010.

Barry R. Weingast has an article in the Journal of Law, Economics, and Organization, titled "The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development."

A range of factors has contributed to China's economic success relative to the former Soviet Union. These factors include, for example, the proximity of South China to foreign capital, notably family wealth of those who had previously fled the communists to Hong Kong or Taiwan; the relatively limited initial scope of economic reform, perhaps including its focus on agriculture while ignoring the large-scale public enterprises; in contrast to the former Soviet Union, China's relatively shorterexperience with communism, its leaders' more pragmatic and less ideological pursuit of socialist economic principles, and a far less interdependent economy. Moreover, in contrast to the republics and satellites of the former Soviet Union, which inherited a range of economic and fiscal problems from their former regimes, China initiated the reforms from a position of relatively strong fiscal health.

All of these factors contributed to China's success. And yet these and related factors provide an inadequate understanding of that success. A central though underemphasized factor of China's economic reform is that it was initiated with political reform. As applied to China, the term political reform usually refers to democratization. Democratization is clearly a central task of political reform, one of sufficient value that it receives special attention. Yet it reflects only one aspect of politics and political reform.'In what follows, I use the term in its broader sense.

As part of the effort to pursue economic reform, the Chinese central authorities instituted a form of political decentralization that limited their own power. This decentralization produced a form of market-preserving federalism. This federalism, Chinese-style, differs considerably from Western-style federalism-for example, in having no connection to individual rights and political freedoms. [ . . . ]

Underpinning this success was the central government's seeming toleration of the loss of political control over local economic policy-making. This has had two effects. First, it has lowered the influence and importance of the relevant ministries of the central government and hence of central planning. Second, the incentives of local political officials changed dramatically. With
the growing success of economic reform, local revenues came to depend on the economic health of the local economy, not on political allegiance to the central government or conformity to a central plan. Paralleling the incentives facing the English justices of the peace during the industrial revolution, decentralization in China provided many local political officials with the incentives to create an economic and political environment that fosters economic growth. In both 18th century England and modem China, prospering economic enterprises provide an expanding local resource base, aligning the interests of local officials with local economic success. [ . . . ]

[T]he economic retrenchment was resisted by local officials from the areas experiencing the highest economic growth, officials who had no interest in seeing the retrenchment succeed. Li Peng, the conservative premier, failed in his attempt to recentralize investment and financial powers from the provinces. The governor of Guangdong refused, and many other governors followed suit.